Giving Up on Federal Help, E*Trade Turns to Self-Help

CFO Bruce Nolop discusses how the online brokerage firm recapitalized itself without aid from the Troubled Asset Relief Program.

The second decision was, Let’s try to fix the problem once and for all. Let’s do a large transaction: sell a public-offering stock issuance and exchange equity for debt.

Were you concerned about dilution?
We knew that this would be enormously dilutive to existing shareholders. But we felt that if we did it right and put the problem behind us, the value of the stock should start going up from that point forward. It was a big decision, and we said to our board that we think this is the right way to go in order to get the value of the company [up]. In other words, the cost of dilution was offset by the reduction in the risk of bankruptcy for the company.

Describe your relationship with Citadel in the context of this decision.
Citadel was a tough negotiator, clearly looking out for its own interest. But the fact that they had such an ownership position and we could negotiate just with them rather than a widely dispersed set of holders was really the key to the transaction. It produced a lot of value for Citadel, but a lot of value was created for the other shareholders and debt holders as well. They were very much in agreement that we needed to do this transaction, and very supportive. We had to work with them in order to do the transaction in a way that met strict regulatory requirements concerning bank holding company structures. Citadel was very creative in doing that.

What was Citadel’s role in your move to a self-help structure?
Most of the transaction was done with them. They exchanged their debt for common stock. Why was that valuable? One reason was that it told investors that this is the way that the company will survive. They felt good about the company’s future, or else they would never have agreed to swap their debt ownership for equity, putting themselves further behind [the preference line] in the event of bankruptcy. They took more risk, and that was very reassuring to the stock market. And they put another $100 million of cash into the company.

As CFO, what was your role in the negotiations?
Don Layton was the key, the prime negotiator. I was the number-two person in the transaction. My role was, first, to give him my views privately. Second, I worked with our financial staff to model and analyze various structures. Third, I was one of the primary people to execute the transactions and work with the investment-banking firms, Citadel, and our internal people to accomplish the transaction.

What were your feelings during that time?
That four-month period totally changed our world. We went from “Will we survive?” to “How do we thrive?” We all got a tremendous feeling of fulfillment and accomplishment. It was a very stressful year, but those four months were some of the most satisfying in my career.




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